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Urban Water Expansion,
Cartagena, Colombia
PROJECT SUMMARY
Cartagena is a city of almost 900,000 people on the northern
coast of Colombia. It serves as the capital of one of the country’s
departments (States), an economic hub and a popular tourist
destination. However, prior to 1995, water/wastewater service
and its provider were extremely unreliable – less than 70 per
cent of the city’s households had water connections and less
than 55 per cent had sewage service. Major portions of the population, particularly those with lower incomes, were provided
water by private vendors, and those with connections to the
water system frequently experienced water pressure so low that
their service was practically nonexistent. The pre-existing system operated with substantial financial losses and had insufficient funding for maintenance or improvement of the system.
Substantial political pressure from the citizens of Cartagena
led to the creation of a public-private partnership (PPP) to repair
and operate the system. Under the leadership of the Mayor, in
1994 the Municipal Council of the city approved the creation of
an “empresa mixta” (mixed enterprise) that combined the
resources of the public works department and a Spanish water
firm. Together, they operate under the name, Aguas de
Cartagena, or AGUACAR.
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Despite some initial opposition and
suspicion of AGUACAR, significant
changes in service were quickly apparent.
The high percentage of non-revenue
water (NRW) caused by leaks in the system was significantly reduced, increasing
the water pressure to existing customers.
AGUACAR began immediate service to
those not connected to the system by
establishing a system of water-truck deliveries to serve these communities. The
financing for these came in part from a
restructuring of the tariff system to incorporate cross-subsidies under which more
affluent customers helped to subsidize the
water rates of lower-income families.
AGUACAR made marked improvements in water-supply and sewage services. By 2005, water supply coverage
increased to 99 per cent of the population and sewage coverage rose to 75 per
cent. Support for AGUACAR remains
high as community members enjoy the
benefits of an improved, more reliable
water supply and sewage service.
PROJECT OBJECTIVES
The primary objective of the PPP
AGUACAR was to provide water/wastewater services to the entire community,
especially to the lower-income households. The Government considered the
pre-PPP availability of water-supply service to less than 70 per cent of households
and sewage service to less than 55 per
cent to be unacceptable, but it lacked the
financial capability to expand the system.
The lower-income portions of the
city were not connected to the municipal
water system (fig. 1) and were served by
vendors that carried cans of water by
donkey into these communities. The
charge for this labour-intensive service
was several times higher than the tariff
charged by the municipal water company. Customers that were connected to
the system experienced poor service –
water pressure was generally low and
often interrupted. The municipal provider
was operating at a substantial loss, largely
because of inefficient management and a
low rate of collection of the water bills.
This level of service generated a flood of
complaints to the Mayor’s Office and ultimately the municipal council’s action that
created AGUACAR in 1994.
A related objective of the city was to
decrease the amount of NRW caused by
leaks in the existing pipes. The city
believed that 40 per cent of the water was
being lost in this way (a later evaluation
showed the actual loss to be closer to 60
per cent) and wished to reduce the loss to
no more than a 25 per cent NRW. This
would increase the quantity of the overall
water supply, improve water pressure,
Figure 1 Area lacking connection
to the municipal water system.
Urban Water Expansion, Cartagena, Colombia
and increase the amount of time each day
that water was available. In addition, it
would improve the long-term financial
situation since the cost of treating and
distributing water that was lost before
reaching a consumer contributed to the
city’s ongoing losses.
A third objective of AGUACAR was
to improve the economics of the system
and make it a financially self-sustaining
operation. This was to be achieved
through increased efficiency in the management of water supply and sewage
services, paired with an increase in the
tariff collection ratio. The municipal
provider had over 1,000 employees, but
water service was intermittent and tariff
collection was less than 50 per cent. Prior
to the creation of AGUACAR, the financial working ratio (the ratio of cash operating costs to cash collections, as a percentage) for the municipally owned
provider was about 152 per cent. The
company was losing money and providing inadequate service to customers.
AGUACAR aimed to improve management, to improve all-around service, and
to eliminate the operating losses.
PROJECT DESCRIPTION
PA R T N E R S
AGUACAR was created as a PPP
between the municipality of Cartagena
and a Spanish water firm on 30
December 1994. This private firm had
substantial experience in the development and operation of municipal water
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systems, a capability that was definitely
needed in Cartagena’s situation.
AGUACAR ownership and management leadership were allocated among
the municipality (50 per cent), the
Spanish water firm (46 per cent) and
other private investors (4 per cent).
Accordingly, the 600,000 shares of
AGUACAR are apportioned as 300,000
to the municipality, 275,478 shares to the
Spanish water firm and 24,522 shares for
the private investors. Resources of both
sectors (public and private) are also
shared under this agreement both in personnel and finances.
I M P L E M E N TAT I O N E N V I R O N M E N T –
L E G I S L AT I V E A N D A D M I N I S T R AT I V E
Under the former National Constitution
of 1886, the President appointed governors for each of the 32 departments (similar to States in the United States), who
in turn appointed municipal mayors
(municipalities are the smaller local political entities within the departments). A
mayor’s role was three-fold: to serve as
the representative of the governor, as the
chief of police and as head of municipal
administration. Like department governors, mayors were appointed on the basis
of favouritism and their ability to support
the national government. This system
resulted in the majority of national government expenditures being spent in the
three largest municipalities and little
being spent in other areas that made up
the majority of the country. This process
also significantly limited citizen participation in the government.
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In 1986, in response to growing civil
unrest, national legislation was enacted to
restructure the office of mayors. With
this legislation, mayors are elected, along
with the members of the municipal council, for terms of four years and therefore
have an incentive to be responsive to the
citizens they represent. Following this
change in the municipalities, a new
national Constitution was adopted in
1991 that made efficiency in public services (water, sanitation, electricity, gas and
telecommunications) a top priority.
Control of these services was put in the
hands of local governments instead of the
national government. The separation of
service provision and national policymaking provided the opportunity for
more private-sector participation in these
sectors, including the possibility of PPPs,
as each municipality was able to choose
the best means of providing service to its
constituents.
Colombia has demonstrated dedication to fulfilling the mission set forth in
the new Constitution. As a step towards
this goal, Law No. 142 was passed in
1994, creating separate regulatory bodies
to oversee each area of public services.
The Regulatory Commission for
Drinking Water and Basic Sanitation
(Comisión de Regulación de Agua
Potable y Saneamiento Básico, or CRA)
was created through the Ministry of
Economic Development to promote
competition, encourage investment, and
prevent abuses by monopolies in the area
of water supply and sewage service. This
national entity was established to make
the governance in this sector more trans-
parent and more responsive to citizens’
needs. The CRA also is in place to make
sure that the decisions made by the local
governments about service are aligned
with the overall national goals.
This change in law expanded the influence of ordinary citizens on the political
system. Without this change, the Mayor of
Cartagena might have been less likely to
become an advocate of finding innovative
ways to improve the water and sewage
services in his city. It was as a direct result
of significant public complaints that the
Mayor of Cartagena responded to the
problems of poor water service, low collection rates, and inefficient management.
With negative cash flows in the municipally owned supplier and limited funds
available, the idea of a PPP was broached.
A feasibility study was conducted to allow
the creation of an “empresa mixta” to be
jointly owned by the municipality and a
private operator. In March of 1994, the
Municipal Council approved the venture
and began closure of the then-current
water agency. Bidding documents were
generated and several companies showed
interest in the project. In the end, only one
company, a Spanish water utility, submitted a proposal and after evaluation, it was
awarded the contract.
Colombia has been a leader in policies for improved conditions in water
supply and sewage. The World Bank has
provided a series of loans for water and
sewage improvements totalling more
than $700 million to Colombia since
1988. The project in Cartagena was the
first of these projects that included a PPP.
Urban Water Expansion, Cartagena, Colombia
FINANCIAL AGREEMENT
AGUACAR was created through an
agreement of the municipal government
and a Spanish water firm in 1994. The
shares of the company were split, with
the municipality owning 50 per cent. The
initial cash invested in the new company
was $4.6 million, 50 per cent of which
was contributed by the private sector.
AGUACAR then entered into a project
to improve the infrastructure and enable
service improvements. It began a planning and development process to address
the long-term improvement of the entire
water/wastewater system. This programme was called the “Cartagena Water
Supply, Sewage and Environmental
Management Project”
This project was financed by a variety
of sources. The project expenses (including the initial investments to organize
AGUACAR) totalled $117.2 million.
Following the initial investment, additional funding for the project was obtained
from both the Government of Colombia
($20 million) and the Municipality of
Cartagena ($7.6 million). In 1999,
AGUACAR received an $85 million loan
from the International Bank for
Reconstruction and Development (IBRD)
through the World Bank to help finance
sewage, wastewater treatment facilities,
and water supply infrastructure. The
grants and loans, when combined with the
original organizing investment, brought
the total investment to $117.2 million.
CONTR ACT PROVISIONS
The Municipality of Cartagena granted
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AGUACAR a 26-year concession contract to operate and maintain water supply and sanitation services, collect tariffs
for water and enforce payment. The
company is the sole supplier commissioned by the municipality. Under this
initial agreement creating AGUACAR, a
Board of Directors was created with five
members: two nominated by the municipality, two by the Spanish water firm, and
one by private shareholders. The Board
then appointed the General Manager of
the company.
In turn, AGUACAR signed a management contract with the Spanish water
firm to help to provide necessary management practices and skills to make the
company more efficient. As compensation under this contract, the firm received
a percentage of gross revenues, which
increased yearly starting at 2.94 per cent
in 1995 and going to 4.25 per cent in
1998. As a shareholder, the Spanish water
firm also received dividends for its shares
in AGUACAR.
Although water supply and sanitation
services were managed by the Spanish
firm, the Municipality still retains regulatory control over AGUACAR. The
Public Services Control Board, which
monitors the quality of service, and the
Drinking Water Regulation Commission,
which approves tariff increases proposed
by the water supply operator, are both
part of the Municipality and make major
decisions that affect AGUACAR.
Through this process and the composition of the AGUACAR Board of
Directors, there is substantial public
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oversight of the water supply and sanitation services.
I M P L E M E N TAT I O N M E T R I C S
Current customers saw an increase in the
reliability of water and water pressure.
Existing pipelines and water meters were
evaluated and repairs were made. A large
percentage of the loss of water (NRW)
was corrected, which increased water
pressure to customers. Service was
extended into poor areas of the city and
management improvements were identified and implemented. Even before new
pipelines were constructed, water trucks
were sent into poor areas to supply those
areas with less expensive water.
Another aspect of Law No. 142 was
that it required a survey of all residential
buildings, including location, form, state
and quality of housing. This information
was used by local governments to classify
all residences on a six-level scale.
Residences assigned a classification of 13 were considered poor, residences categorized as 4 were middle class, and residences assigned a 5 or 6 were deemed
upper class. Using this information,
AGUACAR created a new tariff system
that included a cross-subsidy to benefit
poor customers. Residences were evaluated and classified per the six-category
scale. For customers with high incomes,
tariff rates were set higher than the actual cost of service. This extra revenue then
went to subsidize service to poor residents, whose rates were set below the
cost of service.
The new tariffs were intended to generate enough funds to cover operational
and investment costs. AGUACAR proposed the tariff rates and the Drinking
Water Regulation Commission reviewed
and approved them before rates were
assigned to customers. Residents living in
level-4 houses (middle-class) were
assigned a tariff equivalent to the actual
cost of service. Lower rates were given to
people in levels 1-3 (lower-income
households), while higher rates were
given to people living in levels 5-6 (the
upper-income households). This practice
of cross-subsidization was used to cover
the deficit in tariff revenues that would
have resulted from a general subsidy to
poor households.
Efficiency within the company and in
the provision of services was another
objective of AGUACAR. To increase
efficiency within the organization,
AGUACAR hired back only about 400 of
the former 1,500 unionized municipal
employees (those let go received severance pay based on years of service). This
move improved productivity from about
5.5 employees per 1,000 accounts in
1995 to 3.4 employees per 1,000 accounts
in 2005.
To extend service, about 35,000 new
connections were made, almost exclusively in poor neighbourhoods. Many
poor citizens were skeptical and suspicious of AGUACAR because they were
not used to dealing with a water company. In response, the company hired social
workers and community-relations specialists to explain to residents how water
Urban Water Expansion, Cartagena, Colombia
and sewage service works. Local unskilled
labourers were also hired to complete the
construction of the new pipelines for the
new connections. These actions, coupled
with visible service expansion, improved
the relationship of AGUACAR with the
community.
Another achievement was the
decrease in the level of NRW. Originally,
it was estimated that the loss was about 40
per cent of system volume, leading to an
objective of lowering it to 25 per cent (a
15-per cent net reduction) over a period
of 10 years. However, it was quickly
determined that the NRW was actually
closer to 60 per cent. Nonetheless, with
the
improvements
initiated
by
AGUACAR, the NRW was reduced to
about 40 per cent by 1999, a net reduction of 20 per cent in only four years. In
addition, water coverage went from less
than 70 per cent in the early 1990s to
close to 99 per cent in 2005. The hours of
water service increased from about 17
hours a day to 24. Sewage service availability increased from 55 per cent of
households in the early 1990s to over 75
per cent in 2005. AGUACAR has added
an additional 260 km of pipeline (fig. 2),
bringing the water and sewage network
up to 700 km in total, an increase of 48
per cent.
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Equally important was the objective of
increasing the rate of collection of fees
from less than 50 per cent to 95 per cent.
Many households lacked a water metre,
and in households with metres, they were
frequently broken. This made it very difficult for the municipally-owned provider
to collect tariffs and contributed to the
negative cash flows. To solve this problem,
in the first few months of service,
AGUACAR replaced or added water
meters to existing connections and added
water meters to all new connections. By
2005, over 99 per cent of connected
households had water meters. The
improved billing and tariff collection
improved the percentage to over 90 per
cent in 2005. As a result, the financial
working ratio (as a percentage) dropped to
less than 70 per cent from the 152 per cent
historical figure. AGUACAR also saw an
increase in operating revenue as a percentage of operating costs to about 120 per
cent in 2005. Increases in efficiency coupled with a better collection record gave
AGUACAR positive cash flows.
C O M M E N TA R Y
METHODS FOR OVERCOMING
IMPEDIMENTS
Prior to the decision in 1994 to create
this PPP, there was strong opposition
from the unionized water service workers
to the project because of potential job
loss. Many of these workers had been
hired based on their relationship to the
Mayor and managers of the municipally
Figure 2
Pipeline construction.
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owned provider and not on job-related
qualifications. Under AGUACAR management, many of these employees were
not retained, but those not hired were
provided severance pay based on their
years of service.
AGUACAR also faced the immediate
challenge of many complaints based on
the experience of the previous provider.
Citizens voicing their opinions about
poor service helped to bring about the
creation of AGUACAR, but once the
company took over the operations and
management, some of the vocal criticism
continued. Only through continuous
efforts at improving services and public
outreach was AGUACAR ultimately able
to turn around public opinion about
Cartagena’s water and sewage services.
One of the problems faced by
AGUACAR was that providing services to
poor areas would take time because of the
need to construct new pipelines. Many
poor people had been purchasing their
water from independent vendors at a higher price than that paid by households with
municipal connections. Once AGUACAR
was operational, the PPP began trucking
water to customers in these poorer neighbourhoods. Even though these customers
would have to wait for a connection, they
saw an immediate increase in service and
were willing to support AGUACAR during construction.
AGUACAR worked hard to earn and
keep the support of the community,
which is a necessary step in the success of
a PPP. The majority of the new connections were created in poor areas, where
the people were not used to dealing with
a water company. Many were confused
about the construction process and suspicious of, and even hostile towards, the
workers. Community relations specialists and social workers were hired by
AGUACAR to overcome this obstacle.
Public meetings were held explaining
how water and sewage service worked
and discussing AGUACAR’s methods.
The social workers also helped to set up
payment schedules for customers with
irregular incomes. To further show dedication to the project and the poor areas,
AGUACAR hired local unskilled labourers to construct the pipelines and other
necessary parts of the network.
KEY POINTS
FA I L U R E
OF
SUCCESS
OR
Overall, the “Cartagena Water Supply,
Sewage, and Environmental Management
Project” was successful. Service was
extended into poorer neighbourhoods
and the existing service was greatly
improved. There is continuous water
pressure in the system and leakage has
been reduced. Residents are happy with
the service and vocal in supporting
AGUACAR, especially each time that a
new mayor is elected; they want to make
sure that the new mayor does not do anything to change the service.
Several of the keys to success for a
PPP are very evident in the case of
AGUACAR. The initial investment by
the private sector to organize
AGUACAR required an income stream
for repayment of this investment. Not
only did the Spanish water firm receive
Urban Water Expansion, Cartagena, Colombia
dividends for being a shareholder in
AGUACAR but it also received a percentage of the profits. This arrangement
gave the Spanish firm two reasons to
ensure that the company operated in the
most efficient way, including its operations and maintenance, infrastructure
investments, management of the longterm debt and collected tariffs.
AGUACAR also sought out and
obtained the support of the community,
which made success possible. Hiring
social workers, community relations specialists and local unskilled labourers for
the construction of pipelines helped to
show customers that the company was
different from the previous municipal
provider. Today, AGUACAR has nearly
universal support from the population
of Cartagena.
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